Good morning, and welcome to Malibu Boats conference call to discuss third quarter fiscal year 2020 results. [Operator Instructions] Please be advised that reproduction of this call in whole or in part is not permitted without written authorization of Malibu Boats. And as a reminder, this call is being recorded. On the call today from management are Mr. Jack Springer, Chief Executive Officer; Mr. Wayne Wilson, Chief Financial Officer; and Mr. Ritchie Anderson, Chief Operating Officer. I will now turn the call over to Mr. Wilson to get started. Please go ahead, sir.

Thank you, and good morning, everyone. On the call, Jack will provide commentary on the business, and I will discuss our third quarter financials. We'll then open the call for questions. A press release covering the company's third quarter fiscal year 2020 results was issued today, and a copy of that press release can be found in the Investor Relations section of the company's website. I also want to remind everyone that management's remarks on this call may contain certain forward-looking statements, including predictions, expectations, estimates, or other information that might be considered forward-looking, and that actual results could differ materially from those projected on today's call. You should not place undue reliance on these forward-looking statements, which speak only as of today, and the company undertakes no obligation to update them for any new information or future events. Factors that might affect future results are discussed in our filings with the SEC, and we encourage you to review our SEC filings for a more detailed description of these risk factors. Please also note that we will be referring to certain non-GAAP financial measures on today's call. Such as adjusted EBITDA, adjusted EBITDA margin, adjusted fully distributed net income and adjusted fully distributed net income per share. Reconciliations of these non-GAAP financial measures to GAAP financial measures are included in our earnings release. I will now turn the call over to Jack Springer.

Thank you, Wayne, and thank you all for joining the call. As we sit here today, more than 6 weeks into 1 of the biggest health and macroeconomic crises we have seen in our lifetimes, I'm even more proud of the Malibu team and our ability to deliver on our strategy. Regardless of the environment we are facing, this team delivers results. An incredibly strong fiscal third quarter with this year's boat season momentum at -- extending into March radically changed in the last 3 weeks of the quarter. The number of COVID-19 cases skyrocketed, leading many states to invoke shelter-in-place orders. We mobilize quickly to protect our employees, support our dealers and adjust to reduced demand levels by suspending production at all of our manufacturing facilities on March 24. For the quarter, net sales decreased 8.8% to $182.3 million. Gross margin increased 20 basis points to 25.1%. Adjusted EBITDA decreased 3.7% to $36.4 million and adjusted EBITDA margin increased 110 basis points to 20%. This performance despite an 8.8% decrease in revenue, highlights what an outstanding year we would have had, if we had not removed 7 days of production at the end of the quarter. It is also important to communicate that we are very well capitalized and have over $100 million of cash on hand, more than ample for the current downturn. Once again, our team demonstrated their agility and operational prowess to overcome these substantial headwinds and deliver strong margin performance year-over-year despite the reduced volume. Before the drop in demand late in the quarter, performance across our brands was very strong. Up until that point, results from the boat shows were excellent with the exceptional performance in technology of our model year 2020 products driving Malibu and Pursuit, up double digits compared to the prior…

Thanks, Jack. In the third quarter, net sales decreased 8.8% to $182.3 million, and unit volume decreased 14.2% to 1,796 boats. As Jack mentioned, we suspended production in our plants on March 24. This resulted in about a week less of production in the quarter. However, historically, we experienced higher shipment volumes at the end of the quarter, and the shutdown in the last week impacted us in excess of $20 million in sales. The Malibu and Axis brands represented approximately 63.4% of unit sales or 1,139 units. Cobalt represented 29% or 521 boats and Pursuit made up the remaining 136 boats. Consolidated net sales per unit increased 6.3% to approximately $101,500, reflective of a higher mix of Pursuit sales, year-over-year price increases and an increased mix of larger boats across our Malibu and Axis brands. Gross profit decreased 7.8% to $45.8 million, and gross margin was 25.1%. This compares to a gross margin of 24.9% in the prior year period. This margin included $900,000 of costs related to the UAW strike. Selling and marketing expense decreased 13.3% or $0.7 million in the second quarter. As a percentage of sales, selling and marketing expense decreased by 10 basis points. General and administrative expenses decreased 21.8% or $2.7 million. The decrease was predominantly driven by temporary suspensions at our manufacturing facilities, along with acquisition-related expenses that were attributable to the addition of Pursuit Boats in the prior year period. As a percentage of sales, G&A expenses, excluding amortization, decreased 90 basis points to 5.3%. In addition to temporarily suspending production, we reacted quickly to take costs out of the business and targeted uncommitted expenses for the fiscal fourth quarter to more closely align or cost structure to lower expected shipments. We are currently in the process of evaluating the expected wholesale…

[Operator Instructions] And your first question will come from the line of Brett Andress with KeyBanc.

Hoping, can you give us any more detail on April retail trends? And I guess, more importantly, the cadence of April? Is the month progressed? And I think you talked about some geographic disparities as well. So if there's any color on that? And then the last one is just, any comments on May retail?

Yes. We're -- for April and May, Brett, we're hearing a lot of successful retail stories, like I think everybody else has. And we think retail is going up. It's only natural to assume that as states open up and as our dealers can come back and start selling boats that retail will go up. I think one thing that's helping us that we did not have last year from a retail perspective is temperatures are cooperating, and I think they'll continue to cooperate. So we are seeing that uptick in retail, and we -- it's progressive week to week. So if you look at the 1 April, it was lower, but it has progressed through even last week, and we see that retail increase. I think it's too early to talk about what this is going to mean for the quarter or for the next quarter or anything like that because we're all just kind of in a discovery period and not even all the states are open back up yet. As we get into the first quarter of 2020, we're going to be spending the next 5 to 6 weeks talking to dealers and getting a better understanding of what that's going to look like. But I would say that generally is positive.

So when you say retail increase, you mean retail is tracking up year-over-year?

Not only year-over-year, but it's tracking up versus where it was in March or at the 1 April. I'm saying that each week, retail gets a little bit better, but you still have a lot of dealers that are not opened up. As an example, Maryland just opened up this morning.

Understood. Thank you for the clarity there. And then just -- so obviously, impressive margins in the quarter. As we think about the fourth quarter, Wayne, can you walk us through the kind of current fixed, variable structure and how we should model the next few quarters? And was that mid-teens EBITDA margin in reference to 4Q?

The mid-teens EBITDA margin was not in reference to 4Q. That's in for a -- out there for a kind of 20% to 30% down, more prolonged experience where we can make sure we have the appropriate cost structure. The magnitude of the decrease being 50% -- approximately 50% in Q4, obviously, increases the magnitude of that impact on the margin. And frankly speaking, in shorter time frames, there's a little bit more stickiness around some of those costs. So when we reference cost of goods sold as being over 90% variable. I would tell you, it's in the mid-80s, probably or maybe a hair under that in kind of a Q4 scenario where you're dealing with just the speed and the magnitude of that. So does that -- is that helpful?

That is.

And just referencing, I think, one, what you were trying to get at around April and May, I think what we've seen is that retail demand in the April -- late March and April time frame, how to shock down in that 20% to 30% range. And that it really was generally pretty solidified and kind of reached the base there and has climbed back a little bit from there and gotten a little bit more momentum. So it's not like it's accelerating down. And so I think that's where we think the market is today.

And your next question comes from the line of Tim Conder with Wells Fargo Securities.

And first of all, congrats to the whole team, continued a great execution throughout this whole mess. I wanted to just Wayne, just to make sure we heard that last statement that you made in response to Brett's question. So you're saying that you saw the, I guess, second derivative bottom the end of March, early April at retail, was that -- is that the correct way to interpret that?

Yes. I think from what we saw that you saw the deepest part in the kind of first half of -- the first half of April is what we saw. And it kind of held there for a little while, and you've seen it improving in the most recent couple of weeks.

Okay. And so are we yet on a year-over-year weekly basis, are we yet positive? Again, any color on that at retail?

No. No. Go ahead. No.

No. We're not seeing positive comps. I mean it's a -- look you have a small percentage of the dealers that are not open. You have a small -- you have some percentage of the dealers that have limited operations. So it is not positive at this time.

Okay. And on that front, any color, Jack or Wayne, whoever wants to take this, on what dealers are fully open, what dealers are partially open of the collective network of all the brands?

It's pretty intuitive. It's a state-by-state situation. You still have the dealers in California that -- in California, I would say, in Michigan are the least amount open. But then when you get in some of the southern states, other states, they're much more open. You had a scenario in Utah for a period of time, in which the dealerships could be open, but all the lakes were closed. So that didn't make a whole lot of sense. But you had a lot of different variables that were impacting the dealers. But I would say that probably today, they're still in that neighborhood of 20% to 25% that have some constraints on being open.

Okay. And then along that line, Jack, it sounds like it's probably going to go this way geographically. The dealers were they may be light or heavy on inventory? And then, I guess, in relation to that oil patch, can you comment on how the oil patch is doing from what you're seeing so far in the U.S. and then in Western Canada?

Yes. Tim, as you know, I grew up in the oil patch. I spent the first 24 years of my life in Odessa. So I'm very well versed in that. We have to drive 3 hours to get to a lake in West Texas. So I think the number of customers that are being impacted in the oil patch, except for Canada, I will note that, pretty minimal. But at the same time, when you have a negative you always have a positive. So you have dealers across the rest of the nation that are being able to stay in to those potential boat buyers that your fuel costs are going to be less than half they were if you would have bought a boat last summer. So I look at things that, yes, you have some negative impacts maybe as it relates to the economy in the oil patches, but you have some very positive economic draws that are affecting a lot of other parts of the country.

So specifically, Texas, how is that doing, Jack? And...

And yes. Texas is very diverse. Texas is easily, probably the most prolific economic engine in the nation because of their diversity. So when you get into the Dallas, San Antonio, Austin, Houston, Marcus, they're not nearly impacted with oil and gas prices in Houston a little bit more so. But even through previous crisis -- crises rather, Texas has been a tower. We saw during the great recession that as we were coming out of that, Texas actually went from #3 to #1. And you have some oil and gas phenomenons going on at that time. So what we're seeing is that Texas continues to be very strong, and our dealers continue to be very strong in terms of our overall dealer base.

And your next question comes from the line of Mike Swartz with SunTrust.

Just to start, Wayne, with your commentary on fourth quarter revenue down 50%. I'm just trying to foot that with your commentary on production rates coming back to pre COVID levels when you've restarted. If I just do the straight math, it seems like that would inclined more down in the 30s, maybe even low 40s. But is I guess is April that much more of a production base than May, June? Is that why it does skew a little down a little further?

No. It -- look, it can be a little bit, but really, you got to go back to some of the comments that Jack was making about retail demand and boats that are needing to be delivered before Memorial Day. So we came back and we may be running Fridays to get those boats out to make sure those folks have their boat before Memorial Day and frankly, we may idle a factory after Memorial Day week or for Memorial Day week because we're going to run it hard to make sure we deliver to those customers and we typically bleed down that number or that throughput in the latter part of June or in the June time frame. So ultimately, it's really the combination of those types of factors. If you look at when Pursuit started up as opposed to Malibu that's a couple of week difference. You look at how we're managing the factory dynamically to make sure we're delivering and converting those contracted sales into earnings for us and our dealers. We're just trying to optimize that, and that's why you see a little bit of a difference in those numbers.

And then Just comments -- just sticking with some of your comments on meeting the retail sold inventory and really, for the time being, not really putting anything into dealers' inventory, I guess, you've likely done the analysis. What level of demand would you start to have more concern that maybe you're under inventory going into maybe June or July.

Yes. It really -- that's why I say that we're a little bit of an unknown territory market. It depends on what we see the rest of May in June. As states open back up, could that happen as we get into a model year '21 depending on hard this comes back, absolutely. If you think about it in terms of the amount of time that -- and I just speak of Malibu and you can extrapolate it to the other companies, the amount of time that Malibu is shut down, and we're coming back and we're building retail sold boats almost exclusively. What that's going to do with the retail sales that are going to happen for the 6-week period of time, there's going to be well over 1,000 boats taken out of the channel. So we think that we were in pretty good shape from an inventory standpoint before the shutdown. And when you take that into account as well, we feel pretty good if we have any level of comeback.

Yes. And Mike, we've modeled an immense array of potential outcomes here. And ultimately, I think what you hear from us and what our plan for Q4 is primarily focused on is making sure that the balance -- we think we're striking the right balance in terms of the balance of factors of -- if this were to go at different direction and a little bit further south. And so I think we are monitoring very aggressively what's happening at -- in that in terms of that true retail activity, not just the delivery of the boats that are under contract, but the new conversions to give us as much information as possible to react. There's plenty of inventory, right? We are a seasonal business, our dealers were prepared heading into the season for a larger year. And so we believe that we're striking that balance correctly and the chances that they're going to be meaningfully under inventoried or probably pretty low, and it's a little bit of defense to make sure if it goes other direction, you're not just chasing it for a longer period of time.

[Operator Instructions] And your next question will come from the line of Joe Altobello with Raymond James.

Hopefully, you're all. Wanted to kind of follow-up on Mike's question regarding manufacturing. With you guys resuming production in April and now into May, what kind of capacity utilization are you guys operating at in May and June?

Well, at least through Memorial Day week, where operating at the same capacity utilization we were in March and February, we came back at the same production rates.

Okay. Okay. But no shipments until June, you mentioned, right?

Well, retail shipments, I mean, we are shipping to dealers today. If we're building 22 boats a day, then 22 boats, we'll go out to dealers, but they are retail sold boats. So the way to think about that is that all of the boats that we're building have a customer name on them. So we're not putting -- we're putting relatively few or no boats in the channel inventory for dealers to hold this stock.

Okay. That's helpful. And then just to follow-up on that. You mentioned earlier some 3 votes coming out on the Malibu side in June and obviously, the new Pursuit boat coming out. It doesn't sound like this is impacting your plans for model year '21 at all. So I'm curious, have you heard any pushback from dealers yet? Or it sounds like it's full speed ahead for model year '21?

The dealers want new boats. And just a minor correction, the 3 new boats are coming out in Cobalt. So Cobalt will have 3 new boats coming out this summer, Malibu will have 4 new boats. We are on an aggressive plan with Pursuit, and that will all continue. But in terms of -- dealers are always anxious to have new product, especially for a new model year, and so we'll continue to give them that.

And there are no further questions.

Okay. Thank you very much. In summary of our quarter, we delivered strong operating margin performance despite experiencing unforeseen and unprecedented headwinds as a result of the COVID-19 pandemic. It's impressive and should inspire investor confidence that we were able to close production for 7 days in the quarter, continue to pay employees and benefits, and still generate a 20% EBITDA margin in Q3. We talk a lot about our people being our number 1 asset, and we demonstrated it by taking care of them, paying them, continuing to cover their benefits and bringing 100% of them back to work when it was prudent. We assisted our dealers. We believe better than any other marine manufacturer in getting educated and receiving the limited PPP funds. We have restarted production and are focused on prudently managing our production and delivering outstanding boats to our customers. Our core business strategy remains unchanged as we focus on enhancing our brands and market share during this period. Our vertical integration strategy and variable cost structure is a differentiator in this environment. We have taken swift action and enhance to -- to enhance our financial flexibility and liquidity, and our balance sheet is strong enough to weather any storm. And finally, the experience of our leadership team, combined with our industry-leading operational execution will enable Malibu to emerge as a stronger company. I want to thank each of you for your continued support of Malibu and for joining our call today. I hope you and those around you, are all staying safe and healthy. Have a fantastic day.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.